We can readily understand why investors are attracted to unprofitable companies. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
So, the natural question for Quantum Genomics Société Anonyme (EPA:ALQGC) shareholders is whether they should be concerned by its rate of cash burn. For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
When Might Quantum Genomics Société Anonyme Run Out Of Money?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. Quantum Genomics Société Anonyme has such a small amount of debt that we'll set it aside, and focus on the €12m in cash it held at June 2019. Importantly, its cash burn was €12m over the trailing twelve months. That means it had a cash runway of around 12 months as of June 2019. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. The image below shows how its cash balance has been changing over the last few years.
How Is Quantum Genomics Société Anonyme's Cash Burn Changing Over Time?
Because Quantum Genomics Société Anonyme isn't currently generating revenue, we consider it an early-stage business. So while we can't look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. With the cash burn rate up 21% in the last year, it seems that the company is ratcheting up investment in the business over time. That's not necessarily a bad thing, but investors should be mindful of the fact that will shorten the cash runway. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.
How Easily Can Quantum Genomics Société Anonyme Raise Cash?
Since its cash burn is moving in the wrong direction, Quantum Genomics Société Anonyme shareholders may wish to think ahead to when the company may need to raise more cash. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future growth. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.
Quantum Genomics Société Anonyme's cash burn of €12m is about 21% of its €56m market capitalisation. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.
How Risky Is Quantum Genomics Société Anonyme's Cash Burn Situation?
We must admit that we don't think Quantum Genomics Société Anonyme is in a very strong position, when it comes to its cash burn. While its cash runway wasn't too bad, its increasing cash burn does leave us rather nervous. Summing up, we think the Quantum Genomics Société Anonyme's cash burn is a risk, based on the factors we mentioned in this article. We think it's very important to consider the cash burn for loss making companies, but other considerations such as the amount the CEO is paid can also enhance your understanding of the business. You can click here to see what Quantum Genomics Société Anonyme's CEO gets paid each year.
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